Protracted Wait for G.M. Payback

Taxpayers will have to wait a while to reclaim the money invested to keep General Motors out of the scrapyard. The carmaker is running far more smoothly after declaring bankruptcy last year: it earned as much as $2.1 billion in the three months to September, its third straight quarter of profits. But the terms of G.M.’s coming share sale show that, once public, the stock will have to as much as double before its biggest shareholder, the United States government, gets close to breaking even.

Assume G.M.’s initial public offering starts at $26, the bottom of the projected price range. That would mean the Treasury, which owns 61 percent, would be taking a 42 percent loss on any stock it sells in the offering. It is planning to sell 263 million shares. If it does, G.M. shares would need to more than double to get back into the black on its investment, reaching more than $52 a share, according to a Reuters Breakingviews analysis.

The hurdle for G.M.’s debut performance lowers if G.M.’s bankers can sell the shares at the top of the price range. But if the underwriters sell more of the Treasury’s stock in the I.P.O., the barrier to breaking even increases. The calculation is similar for the G.M. stakes held by the governments of Canada and Ontario.

Over all, this sounds like a tall order. All things being equal, it implies that G.M. will have to essentially double its profits. But it could have been worse. Had the Treasury insisted on dumping more stock on the market, as appeared to be the case just a few months ago, the I.P.O. price might have been lower and the need for a huge increase in G.M.’s value afterward far greater.

The Treasury, whose G.M. efforts are being led by Ron Bloom, changed its tune and focused less on getting out quickly and more on exiting with minimal damage to taxpayers. That is a sensible about-face, but it still leaves getting back in the black a ways off.

Warren E. Buffett may struggle to repeat his Swiss Re exit. The billionaire bailed out three big companies during the financial crisis: the Swiss insurer, General Electric and Goldman Sachs. On Thursday, he allowed Swiss Re to buy back its expensive convertible stock. He may have less leeway to be as generous with the other two.

Of the three deals, Mr. Buffett’s $3.1 billion investment in Swiss Re convertible shares had the most stipulations. Negotiated at the depths of the market slump, the stock paid a 12 percent annual coupon until March 2012, when it would convert into ordinary shares at 25 Swiss francs, or $25.53.

As Swiss Re’s share price is now twice that, the insurer was eager to buy back the convertibles. But it had also agreed to pay Mr. Buffett a 40 percent premium if it redeemed before March 2011, and a 20 percent premium after that.

Mr. Buffett is allowing Swiss Re to pay only a 20 percent premium, as well as the interest he would have received next March. That means he collects $1 billion, rather than the $1.6 billion to which he was entitled. That may look generous. But Mr. Buffett also owns 3 percent of Swiss Re’s stock, which will benefit from the redemption of the expensive convertible securities. The shares jumped more than 6 percent

At first glance, Mr. Buffett faces a similar situation with Goldman and G.E., where he holds preferred shares worth $5 billion and $3 billion, respectively. Both would like to buy back the stock, which pays an annual coupon of 10 percent. He also has warrants over shares of both companies, giving him an incentive to help raise the stock price.

But there is less room for a Swiss Re-style agreement. Because Goldman can redeem its preferred stock at any time for a 10 percent premium, it does not need Mr. Buffett to give it an early discount. G.E.’s stock cannot be redeemed until October 2011, opening the door for a negotiation. But Berkshire Hathaway’s G.E. warrants are deeply out of the money. That means it is unlikely to benefit from any short-term boost to GE’s shares.

Despite Mr. Buffett’s apparent generosity with Swiss Re, Goldman and G.E. should not assume he will take the same approach with them.

For more independent financial commentary and analysis, visit www.breakingviews.com.

A version of this article appears in print on November 5, 2010, on page B2 of the New York edition with the headline: Protracted Wait for G.M. Payback. Order Reprints|Today's Paper|Subscribe